Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-13) + Yahoo Finance
Auditor: Deloitte & Touche LLP — Clean opinion (2 critical audit matters: Level 3 derivative valuations, regulatory accounting)
One-line verdict: NextEra is the largest utility in the United States by market capitalization and the world's largest generator of wind and solar energy through its NEER (NextEra Energy Resources) subsidiary. It operates a dual business model: FPL (Florida Power & Light) as a regulated utility, and NEER as an unregulated clean energy development company. Revenue grew 10.7% to $27.4B, but net income declined $111M to $6.84B, and CFFO dropped 5.8%. The F grade reflects five red flags — the most in this peer group — driven by the combination of utility structural factors (negative FCF, $2.8B cash vs $95.6B debt) and genuine anomalies specific to NEE's hybrid business model: AR outpacing revenue for two consecutive years, revenue growing while CFFO declined, and a critical leverage fail with interest coverage of just 1.8x. The Level 3 derivative exposure ($395M in unrealized gains) and massive $95.6B debt load make NextEra the most complex company in this utility batch.
| Metric | Result |
|---|---|
| Red Flags | **5** (AR vs revenue, revenue vs CFFO divergence, FCF negative, cash vs debt, leverage critical) |
| Watch Items | **0** |
| Checks Completed | **15/18** |
| Beneish M-Score | **N/A** (insufficient data) |
| Altman Z-Score | **0.93** (distress zone) |
Business Overview
From the 10-K, NEE operates through two principal subsidiaries: FPL and NEER.
FPL is a regulated electric utility serving "approximately 5.9 million customer accounts" in Florida. From the 10-K: FPL's base rates were established through a 2025 rate agreement with the FPSC, with "new retail base rates and charges resulting in the following increases in annualized retail base revenues: $945 million beginning January 1, 2026; and $705 million beginning January 1, 2027." This is a massive rate base step-up.
NEER "owns, develops, constructs, manages and operates a diversified portfolio of electric generation and battery storage facilities in wholesale energy markets in the U.S. and Canada." In 2025, NEER added approximately 1,604 MW of new wind, 2,859 MW of solar, and 1,799 MW of battery storage capacity. NEER also "provides full energy and capacity requirements services, engages in energy-related commodity marketing and trading activities."
NEER's net income increased from $2,299M to $2,975M in FY2025, driven by "$967 million from new investments" partially offset by "$604 million in higher financing costs, corporate G&A, asset recycling, state taxes and other."
Financial Summary
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $21.0B | $28.1B | $24.8B | $27.4B | Volatile |
| Net Income | $4.15B | $7.31B | $6.95B | $6.84B | High but declining |
| Gross Margin | 48.4% | 63.9% | 60.1% | 62.3% | Elevated |
| Net Margin | 19.8% | 26.0% | 28.1% | 24.9% | High |
| ROE | 10.6% | 15.4% | 13.9% | 12.5% | Declining |
Revenue volatility ($21B to $28B to $25B to $27B) reflects NEER's commodity trading and derivative mark-to-market activity. Net income of $6.84B makes NextEra one of the most profitable utilities, but the declining trend (from $7.31B peak in FY2023) warrants attention.
Cash Flow
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Operating Cash Flow | $8.26B | $11.30B | $13.26B | $12.49B |
| CFFO / NI | 1.99 | 1.55 | 1.91 | 1.83 |
| Free Cash Flow | $(1.48B) | $1.75B | $4.75B | $3.21B |
| Cash on Hand | $1.60B | $2.69B | $1.49B | $2.81B |
CFFO of $12.49B is enormous, but the 5.8% decline while revenue grew 10.7% triggered the A3 fail. This revenue-CFFO divergence likely reflects working capital changes from NEER's trading operations — derivative margin movements and timing differences in energy contract settlements.
Balance Sheet Scale
From the 10-K consolidated balance sheet:
NextEra's total assets of $212.7B and total debt of $95.6B dwarf every other company in this peer group. The company is essentially a leveraged infrastructure platform.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO | Pass | 54 days, +4 days YoY. Higher than pure utilities |
| A2 | AR vs Revenue | **FAIL** | AR outpaced revenue for 2 consecutive years |
| A3 | Revenue vs CFFO | **FAIL** | Revenue +10.7% but CFFO -5.8% |
A2: This is a genuine concern. AR outgrowing revenue for two consecutive years at a company of this scale ($27B revenue) suggests either slower collections from NEER's wholesale counterparties or accumulating unbilled amounts from new renewable energy projects. The DSO increase from ~50 to 54 days supports this interpretation.
A3: Revenue growing while CFFO declines is the single most important revenue quality red flag. At NEE, this likely reflects NEER's derivative mark-to-market gains inflating revenue without corresponding cash receipts. From the audit report, Deloitte flagged "$395 million in unrealized gains associated with Level 3 transactions" in operating revenues.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory | Pass | +9.3% vs COGS +4.6%. Normal |
| B2 | CapEx | Pass | CapEx +8.9% vs revenue +10.7% |
| B3 | SG&A Ratio | N/A | Utility cost structure |
| B4 | Gross Margin | Pass | 62.3%, +2.2pp. Strong |
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs NI | Pass | Ratio 1.83. Profits backed by cash |
| C2 | FCF | **FAIL** | FCF positive in FY2025 but negative in FY2022 |
| C3 | Accruals | Pass | -2.7%. Low accruals |
| C4 | Cash vs Debt | **FAIL** | Cash $2.8B covers 3% of $95.6B debt |
C4: $95.6B in total debt is staggering. Cash of $2.8B covers just 3%. But NEE is investment-grade rated and has continuous access to capital markets. The scale of debt reflects NEER's project finance model where individual wind, solar, and battery projects are financed with dedicated non-recourse debt.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | Pass | $6.6B = 12% of equity. Manageable |
| D2 | Leverage | **FAIL** | Debt/EBITDA = 6.0x. Interest coverage 1.8x |
| D3 | Soft Assets | Pass | Other assets +20.6% vs revenue +10.7% |
| D4 | Impairment | N/A | No write-off data |
D2: Interest coverage of 1.8x is the lowest in this peer group and critically low. Each 50bp rate increase on $95.6B debt adds approximately $478M to annual interest expense.
Acquisition & Manipulation
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer | Pass | FCF after acquisitions positive |
| E2 | Goodwill Surge | Pass | Goodwill flat |
| F1 | M-Score | N/A | Insufficient data |
Deloitte Critical Audit Matters
1. Level 3 Derivative Valuations. From the audit report: "NEE enters into complex energy derivatives and transacts in certain markets that are thinly traded, which may result in subjective estimates of fair value that include unobservable inputs. For the year ended December 31, 2025, unrealized gains associated with Level 3 transactions of $395 million are included in operating revenues." Deloitte "used personnel in our firm who specialize in energy transacting to independently value Level 3 transactions."
This is the most important audit matter for NEE: $395M in unrealized gains from derivatives that have no observable market prices. These gains are included in revenue but are entirely based on management's proprietary models and assumptions. This explains part of the revenue-CFFO divergence (A3 fail).
2. Regulatory Accounting (FPL). Standard for regulated utilities — the 2025 rate agreement creates significant new regulatory assets and liabilities.
Key Risks from Item 1A
1. Commodity and derivative exposure. NEER's trading operations create both revenue volatility and counterparty risk. Level 3 derivatives of $395M in unrealized gains could reverse.
2. Interest rate sensitivity. With $95.6B in debt and 1.8x interest coverage, NEE is exceptionally exposed to rising rates.
3. Regulatory risk at FPL. The 2025 rate agreement provides $945M in rate increases starting January 2026 — but future proceedings could be less favorable.
4. Clean energy policy changes. NEER's business model depends on renewable energy tax credits, PPAs, and favorable clean energy policies. Policy reversals could impair project economics.
Summary
| # | Check | Result |
|---|---|---|
| A1-A3 | Revenue Quality | Pass-Fail-Fail |
| B1-B4 | Expense Quality | Pass-Pass-N/A-Pass |
| C1-C4 | Cash Flow Quality | Pass-Fail-Pass-Fail |
| D1-D4 | Balance Sheet | Pass-Fail-Pass-N/A |
| E1-E2 | M&A Risk | Pass-Pass |
| F1 | Beneish M-Score | N/A |
Grade: F — mix of structural utility issues and genuine concerns from NEER's trading operations.
NextEra's F grade is partly structural (negative FCF, massive debt) but partly substantive. The revenue-CFFO divergence (A3) and AR growth exceeding revenue (A2) are real anomalies linked to NEER's derivative trading activities. The $395M in Level 3 unrealized gains inflate revenue without cash backing. Interest coverage of 1.8x on $95.6B debt is critically thin. Unlike pure regulated utilities where the F grade is almost always a false positive, NEE's hybrid model with significant unregulated trading exposure means some of these flags merit genuine scrutiny.
**Disclaimer**: This report is based on NextEra Energy's FY2025 10-K (SEC EDGAR, filed 2026-02-13) and public financial data. This is NOT investment advice.
Data: SEC EDGAR 10-K (Filed 2026-02-13) + Yahoo Finance
Auditor: Deloitte & Touche LLP (Unqualified opinion, 2 critical audit matters)